The Oracle of Silicon Valley

Tim O'Reilly is Silicon Valley's leading intellectual and the founder of O'Reilly Media, a steadily growing $100 million company. His life is a vivid demonstration that interesting things can happen when you are working for more than money.

Tim O'Reilly tentatively lifts a finger and then lurches toward a microphone, brushing past a line of besuited men and women that includes Gavin Newsom, the mayor of San Francisco; Vivek Kundra, the White House chief information officer; and half a dozen bored television and radio reporters.

We are in a government building near San Francisco City Hall, and the mayor is plodding through a press conference related to government transparency and technology. Unfortunately, no one -- not even Newsom himself -- seems to know exactly what the announcement is about. There is talk of "apps" and "partnering" and the opportunity to "use information and download that information and mash that information up" -- a small fragment from a long, incomprehensible sentence. In case anyone is confused about the mayor's confusion, he concludes this 10-minute ramble with a grin and says, "I hope you'll get your sound bites from someone else."

Cue Tim O'Reilly, a prolific entrepreneur and a master of turning the most prosaic technology matter into poetry. O'Reilly distinguishes himself in this group by being the only person really capable of explaining why we are gathered here and also as the only person not dressed for the occasion. Gray hair wildly frizzed, he wears an old thermal under a cotton blazer and a pair of wrinkled gray trousers, looking the part of an eccentric professor rather than the CEO of a $100 million company.

In a way, he is both -- at once Silicon Valley's leading intellectual and the founder of a growing and profitable publishing company, O'Reilly Media. The 32-year-old business has weathered four recessions and the decline of the printed book and now employs about 250 people. In addition to publishing some best-selling computer books -- the Missing Manual series is a 117-volume collection on a variety of topics, including how to manage your money and how to use Windows 7 -- O'Reilly Media organizes more than a dozen large conferences and has a dizzying array of other businesses. These include an online education division, a service for reading books online, a popular magazine called Make, and a venture capital firm that invested in Blogger, the most popular blog platform in the world.

But more than any of this, O'Reilly is worth listening to because he has been on top of nearly every important technology development of the past three decades. His company got into the e-book business more than 20 years before the release of the Kindle; it created the first commercial website; and it was making money off the open-source software movement when software patents were still the rage. In short, he is the guy who will tell you what smart people will be talking about five years from now -- the guy who predicts the future.

Today, the future is something O'Reilly is calling Gov 2.0. The city of San Francisco, at O'Reilly's urging, has begun allowing outside companies to tap into its data and create small software applications, or apps, for mobile phones. So far, these apps are modest in ambition -- there is an app, for instance, that will tell you the relative crime rates for wherever you happen to be in the city and another that will tell you the names of the trees on the block -- but O'Reilly thinks they are the beginning of something big. "We've come to think about government as a kind of vending machine -- we put in our taxes and we get out services," he begins, drawing on an analogy he had recently come across in a book called The Next Government of the United States. "And if we don't get the services we want, we shake the vending machine. We get to protest. We write our congressmen. We have a tea party.…But there are better things we can build than vending machines."

Like shiny gadgets. O'Reilly extracts an Apple iPhone from the front pocket of his blazer and holds it up for the cameras. He glances at the phone and smiles, as if surprised by some new discovery. "Apple…built this platform," he says. A platform, he notes, that has attracted some 150,000 apps, almost none of which were created by the computer company itself. He suggests that governments can do likewise, harnessing the entrepreneurial energies of a hundred thousand kids. And he has been trying to convince lawmakers, government contractors, and anybody else who will listen that Gov 2.0 isn't just the future of technology; it is also the future of democracy.

"It's hard to make something as large as a government change," he says. "It's a little bit like building the transcontinental railroad."

What drives entrepreneurs to achieve great things? In a recent article in The New Yorker, the best-selling author and trend spotter Malcolm Gladwell proposes an answer: money.

Gladwell argues that great entrepreneurs are fundamentally "predators" who "seek to incur the least risk possible while hunting." As his prime example, Gladwell chooses John Paulson, a hedge fund manager who made $15 billion in 2007 by shorting the residential real estate market. It's a curious argument -- unlike most entrepreneurs, Paulson made his money from the destruction of value rather than its creation. And yet, in Paulson, Gladwell sees an archetype for the successful entrepreneur. "In the predator model, the entrepreneur's advantage is analytical," he writes. Great entrepreneurs are not visionaries or risk takers -- they just have better economic modeling skills than the rest of us. This may help explain the success of some entrepreneurs, but for most people who build actual companies, it just doesn't wash. The vast majority of businesses are created not to produce as much wealth as possible but rather to give their founders a pleasant life and a sense of personal satisfaction. Yes, most entrepreneurs want to make money, but they are perfectly happy without making billions of dollars a year. They are not predators; they are farmers.

Perhaps because there is small glory in being a farmer, successful entrepreneurs rarely describe themselves this way. Read most corporate histories and you are left with a sense of the founder as master of the universe, not a mere lifestyle entrepreneur. That term, which often carries undertones of laziness, usually describes the sort of person who runs a bar, a sailing school, or a travel company. Lifestyle entrepreneurs, we assume, are of a different species from the ambitious sort Gladwell has in mind. But that is not true, either, and Tim O'Reilly is proof.

"This is a lifestyle business that got out of control," O'Reilly said when we first met. O'Reilly is 55 and has a craggy, weatherworn face, and he speaks with the warm self-confidence of someone who knows a lot more than you do but is happy to share. "My original business model -- I actually wrote this down -- was 'interesting work for interesting people.' "

When he is not running the sort of business that allows him to work on interesting things, O'Reilly lives a simple but generally splendid life. He owns a pair of white Icelandic horses that he enjoys taking care of; he bakes scones and serves them with a strawberry jam that he makes himself; and he has been happily married for 35 years. His company's headquarters, in Sebastopol, California -- a former hippie enclave that has become a popular destination for wine tours -- sits on a 14-acre apple orchard. He moved the company here from Boston in 1989.

And yet amid all this healthy living, O'Reilly Media has had the kind of impact normally associated with much larger enterprises -- and greater than that of even the most successful hedge fund manager. O'Reilly's work has inspired an entire generation of entrepreneurs -- and his blog posts and essays can push big companies to drastically change course. "Tim really can make a whole industry happen," says Google CEO Eric Schmidt, who credits O'Reilly with helping to popularize the Web and says he expects O'Reilly to pull off the same trick with Gov 2.0. Evan Williams, CEO of Twitter, the hot start-up of the moment, says he owes much of his success to O'Reilly's work. "There's a quick-money unoriginality that is often pervasive in Silicon Valley," Williams says. "Tim has the ability to push people like myself to think bigger and more creatively."

Tech entrepreneurs who have yet to make it big generally regard O'Reilly with something approaching reverence. Darrius Thompson, the founder of OpenCandy, a software company in which O'Reilly has invested, vividly remembers his first meeting with Silicon Valley's unofficial prophet. He was waiting in a conference room in Sebastopol for a meeting with O'Reilly, and he found himself gazing out the window at the apple trees. As if out of nowhere, he saw a middle-aged man with a white beard, who seemed to be floating toward him.

Thompson was hit with a wave of the giggles as he realized that the floating figure was O'Reilly, walking down from a crest beyond the trees. O'Reilly made his way toward the building and disappeared from Thompson's field of vision for a few moments before entering the conference room and proclaiming, "I have no idea why I'm meeting with you, but I feel like I just have to." Thompson, who had always imagined O'Reilly as a sort of mystic, was positively giddy. "Whenever people ask, I always describe him as the Oracle in the Matrix movies," he says. The Oracle is a humble but wise old lady who bakes cookies and has a mysterious ability to predict the future. "That's Tim," Thompson says.

Tim O'Reilly grew up in the Bay Area, one of seven children, to parents who emigrated from Ireland when he was a baby. His father was a neurologist -- O'Reilly fondly recalls getting radioactive copper isotopes injected into his arm as a 14-year-old research subject -- and a deeply religious man. Tim was a voracious reader, of historical novels, of Aristotelian philosophy, and, to his father's horror, of science fiction. At age 20, while majoring in classics at Harvard and studying ancient Greek, O'Reilly rebelled further, marrying a non-Catholic woman seven years his senior. The marriage caused a rift: He did not return home for years, and his parents refused to meet Christina O'Reilly until 1982, when Tim's father was dying of heart disease.

O'Reilly coped by seeking out father figures: first George Simon, a practitioner of a New Age philosophy called general semantics, which stresses a kind of introspective observation. He also became close with his father-in-law, John Feldmann, the founder of a media-buying firm in Los Angeles and the first person O'Reilly encountered who seemed to find business itself to be a worthy pursuit. "We had very different values, but we became close," says O'Reilly. As the young couple struggled to pay their bills by teaching Human Potential workshops, O'Reilly began to see starting a company as an interesting way to live life on his own terms. "I wanted more control of my life," he explained in a company newsletter in 2002. "I wanted work to fit in, not to dominate; to support, not to lead the pattern of my life."

O'Reilly was no more a techie by nature than he was a businessman. In fact, before starting his company, he had never seen a computer. He landed in the field as a favor to a friend, Peter Brajer, who had won a contract to do some technical writing but needed help with the writing part. The job turned into a consulting practice. It was unlikely work for a guy who fancied himself a Human Potential scholar, but it paid well, and he liked the challenge. "Learning has always been something of a drug for me," O'Reilly says. By 1983, he had learned enough about computers to strike out on his own.

For much of the 1980s, O'Reilly & Associates, as it was called, was not so much a company as a collective. O'Reilly hired people like himself: smart, young generalists who seemed as if they might enjoy the challenge of learning something new. There were no full-time employees besides the founder -- just contractors, who would show up at his home when there were consulting jobs. "It was a mix of kindergarten and grownups," says Dale Dougherty, an aspiring writer whom O'Reilly brought into his tribe in 1980 and who would eventually become a 15 percent partner in the business. (O'Reilly owns the remaining 85 percent.) "We had an aversion to the business world, and Tim had this alternative perspective that was very attractive," Dougherty says.

This is not to say that O'Reilly was undisciplined. Christina O'Reilly recalls that her husband was constantly on the phone with her father, going over the latest numbers, and that he would often work late into the night. "It was hard for me," she says. "It was so different from my image of where I thought we were going. But Tim was following his inner talents." O'Reilly never raised outside capital; he funded his projects through profits. "There is a wonderful rigor in free-market economics," he wrote in an early company manual. "When you have to prove the value of your ideas by persuading other people to pay for them, it clears out an awful lot of woolly thinking." Just in case anyone was worried the boss had lost his touchy-feely touch, he went on to compare free-market economics with the poetry of Alexander Pope.

Like almost everything O'Reilly Media has done since, the fortuitous decision to enter the book business -- which coincided with the rise of the personal computer and, therefore, an explosion in the market for computer books -- happened thanks to the founder's observational acuity and a series of happy accidents. O'Reilly began offering discounts to clients who allowed him to retain the copyright to the manuals he was writing for them. He initially resold these manuals to other consulting clients, but in 1985 he began distributing them to the public. The volumes were slight -- just 80 pages or so, stapled together -- but that made them more attractive to consumers than the big, expensive textbooks that existed already. And because they were small, they wound up in their own section in bookstores. "Our whole model was exploratory," O'Reilly says. "We didn't know very much, but that helped us. Our ignorance was our strength."

As early as the late 1980s, O'Reilly was pretty sure his consulting clients would eventually want their manuals available on computer screens as e-books, and he and Dougherty began investigating ways to make that happen. The search led Dougherty to a number of software developers who were working on ways to display graphics online, as opposed to the plain text system that already existed on the Internet.

In 1992, O'Reilly published The Whole Internet User's Guide & Catalog and, at the last minute, added a chapter about the World Wide Web. At the time, there were roughly 200 websites, none of them run by companies. To market a general-interest book from a small publisher about a relatively obscure topic, O'Reilly devised a novel marketing strategy: He would turn himself into an activist. He hired the former director of activism from the Sierra Club and devised a campaign that treated the adoption of the Internet like the effort to save the rain forests. He mailed copies of the book to every member of Congress and then went on a media tour in New York City and Washington, D.C. "I was saying, 'The Internet is coming; the Internet is coming,' " he says. And O'Reilly Media had the only book that could explain it to you.

The strategy worked brilliantly. Many of the first mainstream newspaper articles about the Internet were pegged to the release of O'Reilly's book. "Internet Provides Way to Tap Into World of Information," was the headline in the Chicago Tribune. By the time dot-com fever hit, O'Reilly was the expert in the field. The Whole Internet sold more than a million copies, a huge windfall for the tiny publisher.

Another outgrowth of O'Reilly's interest in digital publishing was something more ambitious: the first Web portal. In 1992, Dougherty decided that a good way to market The Whole Internet would be to place computer kiosks in bookstores to show people what the Internet looked like. Unfortunately, there wasn't a whole lot on the Internet to see. So O'Reilly hired a team of five people to build the world's first commercial website. It featured a boxy design, multiple fonts, cheesy clip art, and advertising from the likes of MasterCard. The chief attraction was a directory of useful websites.

The Global Network Navigator, or GNN, was a "wild-ass scheme," O'Reilly says. It cost $2 million -- an enormous sum for a company with $7 million in revenue -- and it ate up all the company's profits for two years, causing tensions between book publishing employees and the new Web team. "Our employees were unhappy," O'Reilly admits. "But for me, it was interesting work." In 1994, O'Reilly Media was approached by two Stanford students, Jerry Yang and David Filo, who were looking for funding for their nascent Web directory, Yahoo.

But O'Reilly couldn't afford to back Yahoo. In fact, he barely had enough money to run GNN, so he began meeting with venture capitalists about a possible investment. But the more VCs he talked to, the more he worried that taking other people's money might either force him to pursue uninteresting things or cause him to lose the business altogether.

In 1995, O'Reilly negotiated the sale of GNN to AOL for about $14 million in stock and cash. From a predatory perspective, this was a very bad deal -- a year later, Yahoo would go public at a valuation of about $300 million. But for O'Reilly's lifestyle business, things worked out just fine. By the time he sold his stock, he walked away with roughly $40 million (enough that he would never have to worry about money again); he kept control of his company; and he insulated the company from the worst excesses of the dot-com bubble.

O'Reilly says he sometimes wonders what would have happened if he had raised venture capital and given his company a chance to get really big. But he sounds more amused by this question than truly troubled by it. "Money is like gasoline during a road trip," he says. "You don't want to run out of gas on your trip, but you're not doing a tour of gas stations. You have to pay attention to money, but it shouldn't be about the money."

Do you know anything about chemistry?" O'Reilly asks me. The answer is no, not really. But I say yes, not wanting to disappoint; and O'Reilly, like any good professor, assumes that I'm lying and proceeds to explain it to me anyway.

Chemical reactions, he says, require activation energy in order to begin, but once that happens they tend to proceed on their own. "I think there is that quality in this company," he says. "Right now, the industry is getting really excited about e-books, but we've been working on e-books for 23 years." Book publishing has been in crisis for the better part of a decade. For every three independent bookstores that were in business in 1990, two are now closed. But O'Reilly Media is making more money selling books than it ever has. Overall, revenue at the company is up 20 percent from 2000, when the market for computer books peaked.

This is thanks in part to a booming conference business -- the largest of O'Reilly's events, Maker Faire, a sort of Woodstock for the do-it-yourself set, attracted 70,000 attendees last year -- and thanks also to the company's early investments in e-books. At the nadir of the dot-com bust, O'Reilly launched a subscription service called Safari, which allowed users to pay a monthly subscription fee to read books online. He persuaded his largest competitor, Pearson, to finance the project, and it was launched as a 50-50 joint venture. It now offers e-books from dozens of publishers and attracts tens of thousands of individual consumers who pay up to $42 a month and thousands of corporate clients that pay more. The service contributes more revenue to O'Reilly Media than sales of its printed books in Barnes & Noble stores. (Only Amazon.com represents a bigger sales channel.)

Another promising development has been the success of books sold as iPhone apps. O'Reilly offers a handful of its books as $5 apps -- a very aggressive pricing strategy, given that many of the books retail for $15 on the Kindle and even more in print, but also one that has paid off handsomely, attracting readers from other countries, where O'Reilly books are hard to find. The company has sold more than 100,000 apps in Apple's App Store.

In 2005, O'Reilly promoted his chief financial officer, Laura Baldwin, to chief operating officer and started turning over operational responsibilities. Today, he spends most of his time gathering information -- reading blogs and webpages, checking Twitter, and taking pitch meetings with entrepreneurs. O'Reilly says his process is to look for patterns -- "faint signals," he sometimes calls them -- and to figure out what those patterns say about the future. Then he launches businesses: a conference or a new line of books. He invests in start-ups through his venture capital firm, O'Reilly AlphaTech Ventures.

Gov 2.0 is a case in pattern recognition. When Barack Obama was elected President after running on a platform that included increased government transparency, O'Reilly's thoughts about the relationship between government and technology began to coalesce. He published a book -- Open Government, by Daniel Lathrop and Laurel Ruma -- and launched a conference, at $995 to $1,495 a head, that attracted a sellout crowd in Washington, D.C., last September. Two more Gov 2.0 events are planned this year, along with more books and more plans to get Washington lawmakers to pay attention.

Beyond getting the word out about any particular idea or trend, O'Reilly says he has tried to use his company to demonstrate that being an entrepreneur can represent a means of exploring the world, one that is just as profound as religious inquiry or Greek philosophy or New Age introspection. "Business doesn't have to be separated from the rest of life," he says.

O'Reilly is old enough and rich enough to consider retirement. But if he sold the company today, he is not exactly sure what he would do. A life that doesn't include helping out with the construction of the next transcontinental railroad doesn't sound to him like a very interesting life. "When I imagine what it would be like, it's like, What would I do then?" he says. "Right now, I have this tool that I can use to make stuff happen. If I sold it, I'd just have money."

Over the years, O'Reilly has written many influential essays, which are available on his blog, O'Reilly Radar. There is "Watching the Alpha Geeks," which argues that most important new ideas come from hobbyists rather than from companies or research labs; the essay helped to popularize the theory of user innovation. There is "Piracy Is Progressive Taxation," an argument against the strict enforcement of intellectual property laws. There is "The Open Source Paradigm Shift," which helped catalyze the movement toward free software.

These essays, and others like them, are interesting as artifacts, but the real wisdom in O'Reilly's work is found in the company newsletters he wrote when O'Reilly Media was still small and its influence still slight. The best of these is a short meditation on the nature of business, published in February 1995, just as excitement about the Internet was heating up. Back then, everybody O'Reilly knew was getting rich, and he had been talking to investment bankers about a possible sale or initial public offering of GNN. During a particularly memorable meeting, a banker advised him to focus less on work that was interesting and more on work of the moneymaking kind.

As O'Reilly tells it, the banker chastises him with a metaphor. "You don't fish with strawberries," the banker says. "Even if that's what you like, fish like worms, so that's what you use."

At first, O'Reilly accepts this advice. Who can argue with the idea that customers should get what they want? But as he thinks it over, he begins to see things differently. "[A] small voice within me said, with a mixture of dismay, wonder, and dawning delight: 'But that's just what we've always done: gone fishing with strawberries,' " he writes. " 'And it's worked!' "

It's hard not to read these words as a parable, meant not just for his small staff of book editors but for any person in business -- maybe even for anyone trying to make his or her way in the world. "We seek to find what is true in ourselves...trusting that resonance to lead us to kindred spirits in the world, and them to us," O'Reilly writes. "I like to think that we have the capability to fish with worms when necessary, but in general, we're farmers, not fishermen, and strawberries go over just fine."

Senior writer Max Chafkin wrote for the April issue about Inc.'s test run as a virtual business.